While this is a common misconception, I believe it mixes up two ideas, estate planning and estate tax planning. Estate tax planing is actually a small, but important, part of the overall estate planning process.
Estate planning is about making sure your estate is in order and passes as you wish. Estate tax planning is making sure the government gets as little of your estate as you can.
Estate planning uses a trust, or a will, to organize your affairs and distribute it to who you care about when you die. Estate planning is for tax and non-tax reasons. Of course no one is required to have an estate plan. Many would be unhappy to know that our legislature in Arizona has written an estate plan for everyone that hasn’t written an estate plan themselves.
“Putting my child’s name on an asset avoids probate”
This is how the conversation usually goes: “someone told me if I put my child’s name on my bank account, upon my death it goes to that child and I avoid probate.”
This particular myth is a real “land mine” waiting for an unsuspecting person to step on. Some assets do pass by title and by operation of law, most notably bank accounts and real estate, and therefore escape the need for using a Will or trust to transfer to the surviving joint tenants, at least until the death of the last surviving tenant on the asset. After all, your estate is going to them after you die anyway, right?
First, if you add a child as a joint tenant on your account or home, you have potentially made a taxable gift to that child. If gift tax is to be paid, it is the donor who pays it, not the recipient.
The bigger issue is your child is now on title with you. This means that your home (or other joint account) is now exposed to what might go wrong in the life of that child. What happens to your home if your child declares bankruptcy, and is listed as an owner on your home? Maybe it’s not a bankruptcy, but an auto accident where your child is “at fault”, and the resulting settlement exceeds the liability limits of your child’s auto insurance. Might your home or other assets potentially be at risk due to the joint tenancy title arrangement? The answer is yes.
Notwithstanding the liability issues discussed above, your child is under no legal obligation to share this distribution with the other children, and could simply keep the entire balance of the joint tenancy property. No one would ever do that, would they? I leave the reader to answer that question.
In conclusion, before you think of using Joint Tenancy as the “simple” or “easy” way to avoid the need for a formal estate plan, consider some of the issues just covered. Is that something you are willing to risk, just to avoid drafting or revising a Will or trust?
This was a column in a local paper that got me thinking that this is actually a very commonly asked question. First, it doesn’t all go the State. It may but this is very unlikely.
Basically, the State of Arizona has written a Will for you if you fail to do one yourself. If your wishes are not the same as the one written into statute, you will need to do a Will, or a Revocable Trust, to spell out your own wishes.
The State’s “intestacy” statute basically states your estate will go to your spouse if you have children that are also the children of your spouse. Otherwise, it is divided between your spouse and children from a prior marriage. If you are unmarried and without children, to your parents, and so on.
If you have remarried, a blended family, have a significant other or have other heirs you want to leave part of your estate to, you need to overcome this statute by creating your own Will or Revocable Trust. It is actually quite simple to do.
Kevin P. McFadden
Knollmiller & Arenofsky, LLP
This question gets asked a lot. Sometimes it is asked if the Feds or Arizona tax you when you die? Sometimes it is asked if the State gets part of your estate when you die? Mostly it is thought of in terms of probate whether you have a Last Will & Testament or not.
The short and simple answer for almost everyone is zero, the Feds and Arizona gets absolutely nothing when you die. Of course there are exceptions, but they are very limited.
One exception is if your total estate is over $5,250,000 at least for year 2013. If a married couple have done proper estate planning they can pass $10,500,000 this year estate tax free. And no, the State of Arizona does not have an inheritance or death tax. Some states do but Arizona does not.
Another exception is if you do not have a Will or Trust and you have no heirs. This means no parents, children, spouse, nieces and nephews, cousins, etc. Very rare, but possible. If this is the case, the State of Arizona takes the entire estate.
Another exception, but I don’t really think this should be thought of as an exception but basic taxation, is that if you have any assets that are pre-tax, for example an IRA, then when the funds are distributed, they are subject to income tax as they would have been if the person was still alive.
So in answer to the question, no, the Feds and the State of Arizona will very unlikely get a piece of your Estate. Of course this doesn’t mean your Estate will go where you want it to without careful estate planning. That is a subject of another post.
Estate tax critics very often say the estate tax hurts farms and family businesses. I certainly don’t want to enter the tax vs. limited tax debate so I will offer no opinion here but the dialogue should be with the facts, not statements that are repeated so often they get treated as though it were facts.
Back in 2010, Sen. Chuck Grassley, a Republican from Iowa, stated that the government shouldn’t take “more than half the estates of farmers and small business owners who have scrimped, sacrificed and saved their entire lives to build up a family business.”
An IRS report back at the time the estate tax limit was 3.5 million casts doubt on the claim that farmers and small-businesses are the main victims. According to a white paper by Brian Raub, an economist with the IRS Special Studies Special Projects section, farms and family-owned business account for a small fraction of estates worth $3.5 million or more.
The study shows that in 2007, investment real estate — which includes farms, undeveloped land, real-estate investment funds, real estate partnerships and other investments — accounted for only 15% of total portfolios for estates over $3.5 million. Farms are only a fraction of the 15%.
Limited partnerships and business assets account for about 5.5% of their total assets.
So what is in the big estates? Mostly publicly traded stock. The study found that publicly traded stock accounted for more than a third of the assets held by estates of $3.5 million or more.
It is reasonable to assume that the current limit over 5 million will include even less family farms and small businesses if you believe what you read about the value of these farms and businesses at the present time.
Of course, some small businesses and farmers will get hurt from the current 5+ million estate tax limit but it’s misleading to say farmers and small businesses would bear the brunt of an estate tax.